THOUGHTS ON THE MARKET FOLLOWING FEDPOCALYPSE 2012
I'll be putting together a detailed review of the significant price action thus far in the week tonight. What is important to note thus far in the session is that the S&P has pushed through four resistance levels (three minor, one major) in one push. This is typically indicative of a move that is A) either just beginning or B) in the process of blowing off to the upside. In this case, I think the answer here is A. It doesn't come without challenges, however. You cannot simply buy into the market here and expect vast profits into year-end as Santa (aided by the Fed) bestows vast riches. A range bound period over the next week targeting 1210-1240 on the S&P wouldn't at all be unusual and would, in fact, be a positive for the bulls. It will have the looks of an imminent top. Judging by spectator skepticism in this market, it will also be shorted or liquidated into, giving the market firepower needed for a convincing push above 1250. The wildcard is that we are about to enter a period of choppy price action similar to August-October time period where this type of move is retraced in the days ahead. I think that this is a distant possibility, however. Nevertheless it should be in the back of a traders mind as a plausible scenario. Of concern is primarily the action in the Euro, which I would have expected to be a lot more convincing today. The major European indices look to be carving out a substantial bottom, however. That is in direct contrast to a European news flow that has not just been persistently gloomy, but apocalyptic. This type of divergence in news flow and price action is typical of substantial bottoms and in fact, essential to their formation. More...
MARKET THOUGHTS OF THE PURE VARIETY
Unfortunately, we're in a place in time where I only have opinions. Those opinions are not substantial enough to make into trades. I've never been an advocate of taking on multiple trades across multiple sectors across multiple time-frames. Maybe it's because I'm just not build for it. I like to have a few concentrated positions that I can focus on without having to hire a staff of interns to assist. My current opinion is that the market still requires work before it decides a direction. I'm leaning to the upside being the direction it eventually moves due to numerous factors: seasonals, sentiment, price structure, domestic economic improvement, earnings season in January being smashing. I am open to changing my mind, however, based on how the market acts going forward. Over the short-term with the downgrade of banks by S&P and subsequent reaction in futures it seems that we are setting up for the last day of November and first few days of December to be difficult ones. It shouldn't come as a surprise since this year has been marked by weak openings to new months. If we are going to put in a significant bottom for December it should be late next week or early the week after. I'll be looking to get more involved in the market then. For now, I am happy holding a good sized position in TMV and lots of cash. This isn't a market to get overly involved in one way or another for the time being. If you want action, may I suggest dressing up as a raspberry and running around a blueberry...
THE MARKET POSITIVES AND NEGATIVES FOLLOWING A MANIACAL MONDAY
There are times when the market puts together a rally that under normal conditions would be seen as a very good day. However, due to circumstances the rally is greeted with the same enthusiasm as a herpes outbreak. Today was one of those circumstances. From my perch, it seemed that a majority of traders were looking to either short this rally or build up greater reserves of cash. You could see it in the volume. No longer can volume be used in the typical A)Low volume = bearish B)High volume = bullish way that traders managed to profit from eons ago. You know what the ultra-low volume that we saw today indicates? Absolute fear. It means that every fund manager, analyst and retail trader hated what they saw today to the point that they either held onto their shorts or just remained in cash. That's a good thing for the bulls. The market has scarred, maimed and vamoosed enough individuals and institutions to the point where 300 point up days are passed on. I won't go into the fact that we basically gapped up near 300 points on the open. Welcome to the new normal of 2011. Unless you are willing to step in front of the freight train as it is sliding down the tracks, you have to chase your opinions up or down. The market either reacts with a gap on the open or in the last hour of trading. Again, the new normal in the insane asylum that has become Wall Street. I'll tell you what I didn't like today: - The action in bonds stunk. Since I am long TMV it stunk even more. - It would have been encouraging if the Euro would have held on a day that was supposedly driven by hope out of Euroland. - The reversal in various commodity issues doesn't help the bulls. - Neither did the weak close in financials. What I liked today: - The action in gold is encouraging. While it didn't close on its highs, it managed a respectable move up. Gold moving up seems to be an important leading indicator for the market. I outlined my thoughts on using gold as a bottoming indicator for the market some days ago. - The sentiment I am seeing across multiple platforms is downright bearish. This rally has already been deemed hopeless. We may as well be at the Friday lows already according to most. - Tech and small-caps led the move up. That's what you want to see as we approach December. Where does this leave me? With a lot of cash and a mid-sized position...
5 LONG-TERM CHARTS TO HELP CLEAR OUT THE NOISE
Note: I would usually be doing the weekly review looking at the intermediate term picture for the important components of the market. However, being that Dow futures are currently up some 200 points, the price action will look completely different by mid-week. So this seem like a good time to zoom way out and look at the monthly charts to gain some perspective. I will likely do an update towards mid-week as it seems we are headed for another week of Euro led mayhem and volatility. click chart to...
NOV 25th: PORTFOLIO POSITIONING
During the final minutes of trading on Friday I took a mid-sized position in TMV. I posted the following tweet shortly after the close: This is a short long bond/long yields trade. The dynamics behind this trade are similar to the short gold trade I initiated in September. On August 21st, I posted an article with respect to the fact that a majority of future scenarios results in lower gold prices. Basically, there were very few scenarios that would see gold continue shooting up. I believe the same to be true with the long-dated US debt at present. If you remember during the 2008 crisis, the second leg of the crisis saw yields skyrocket while equity prices plummeted. This was in direct contrast to the first leg of the crisis which saw US debt become the investment of last resort. That mentality changed as fear turned into panic. At present, we are getting to a point where if things continue moving down the fear we have seen over the past few months will begin to turn to panic. There is a pronounced difference with our current crisis, however. The sovereign debt of our next door neighbors (economically speaking) are being drawn into question now. With this past week seeing the debt of Germany actually being greeted with some suspicion based on worries of a worst case scenario for the EU taking place. You can bet if the panic police are knocking on Germany's door, it is only a matter of time before they come looking in the next door neighbor's house. Not to mention, we have seen that when fear turns to panic, all bets with respect to the stability of so called "bastions of safety" come off the table. The alternative scenario is that we begin recovering some of our equity losses here over the next couple of weeks. In which case, attention will begin shifting to the US economy and the potential for another great quarter of earnings in January. Given the compressed state of yields, we are far from factoring in any type of economic stability, with fear and subsequently safety being at the forefront of investor's minds. From my perspective, it seems that either way you slice the short bond/long yields play, it has entered a zone where substantial odds favor an increase in yields over the short to...
THE MIND-BENDING CONFLICTS THAT TRADERS FACE IN THE WEEKS AHEAD
You want mind-bending levels of difficulty in a complex, volatile structure? The current state of the financial markets is handing it to you, gift-wrapped in a fancy box for your holiday enjoyment. The fundamental problems we face are strewn throughout the financial media. There is no need for me to regurgitate what has already been dissected a million times over recently. If it's not Europe, it's China. If it's not a recession in 2012, it's a collapse of a significant member of the banking community. The list goes on. The fundamentals are impossible to interpret accurately, much less initiate a trade through whatever insight can be gleaned from such data. That leaves us with technical data, seasonal data, and the various pieces of anecdotal evidence that we tend to use in an effort to profit. Problems arise when these pieces of data begin to conflict with each other to no end. Here are the conflicts as I see them: 1. Captain Obvious time: Seasonals. This has been discussed more than the crisis in the EU recently. You all know the story. It's Q4. A seasonally strong period. What I should add that isn't discussed nearly as much is that we are in a Q4 following a double digit decline in Q3. That fact changes everything and in fact, makes the bull case as solid as a rock. Here are the results: When the market has fallen by more than 10% during the 3rd quarter, a rally in the 4th quarter has not failed since 1957. The last seven instances were: 1974 Q3 -26.12% Q4 +7.9% 1975 Q3 -12.21% Q4 +7.54% 1981 Q3 -11.45% Q4 +5.74% 1990 Q3 – 14.52% Q4 +7.83% 1998 Q3 – 10.32% Q4 +20.85% 2001 Q3 – 15.03% Q4 +10.38% 2002 Q3 – 17.68% Q4 +7.98% 2011 Q3 – 14.38% Q4 +2.48% to date Needless to say, we're sitting at the very low end of the expected results at present. No study is infallible. Just like every other statistic with respect to the market, the death of this one is inevitable. Will 2011 be the outlier? Answer that question and December will be yours. 2. Verbal and Psychological Sentiment: Negative. It's ugly out there. I am seeing it in the blogosphere. I am seeing it in the anger with which anything bullish is shredded into confetti. Anything having to do with economic infrastructure, whether in the form of banks, Wall Street, government agencies, guys with suits and lots of hair gel is hated to the point of vitriolic nausea that I haven't witnessed since Steve Bartman...
THE 4 PROBLEMS THE MARKET CREATED FOR ITSELF THIS WEEK
The 4 problems the market faces due to the price action of the past few days. Enjoy your Thanksgiving. click chart to enlarge
RISK ASSESSMENT WEDNESDAY: A LESSON IN CONFLICT
For those unaware, risk assessment Wednesday is one of the methods I use to control risk in the portfolio. It's a very simple concept. Basically, if positions are running at a loss, Wednesday is when I am forced to look at them on an unbiased basis. I will inevitably reduce risk in the portfolio if the trend amongst the holdings is detrimental to portfolio value. It's one more way of taming volatility and keeping a balanced mental capacity regardless of the situation. Risk assessment Wednesday was born out of my tendency to become so convinced of my thesis with respect to the markets that literally nothing would stand between my finger and pressing the buy (or sell short) button in an effort to take on as large a position as possible. This tendency led to a stellar rise in my former hedge fund. It also led to the dismantling of that very same fund just two years after I was at the top of the game. It is essentially my way of preventing one of my admitted weaknesses from costing me performance. I don't care how good you think you are in this business, if you haven't tailored your strategy with specific attention to minimizing the potential of your weaknesses and maximizing the potential of your individual strengths, then you already have one foot in the grave. Risk assessment Wednesday is weakness control. With the conflicting signals I am seeing in the markets currently, risk assessment Wednesday this week was a no-brainer. The seasonal studies based on performance of the market thus far in 2011 are pointing to a market that is bound to move higher. As are various sentiment and correlation based studies. On the other hand the price action now is officially disasterous. Far beyond any type of conceivable fake-out or normal pullback within a bull trend. And this is paired with the results of the study I published last night. The study nailed the August-October time period. I am not sure if the results will be as stellar here. However, it deserves a great level of respect given its accuracy over the past several years. The basis of the study is grounded in the premise that oversold markets that are steeped in pessimism have a tendency to run further to the downside than most anybody expects. When markets fail to respond to deeply oversold conditions while paired with excessive levels of pessimism, it is a sign that the market mechanism (or deception mechanism as I like to call it) has broken down. This is the point when markets become the most dangerous. More or less burying...
NOV 23rd: PORTFOLIO POSITIONING
Early in the morning, I tweeted the following: More on this...